Perhaps the most significant enemy to generating wealth through investing is ourselves. The instinctive reflexes in our cave-people brain tend to give into rash decisions based on greed or fear that tend to eat away at your profit potential. The best investors of our time were no doubt smart people, but perhaps their greatest trait was an ability to conquer their own emotions and stay true to their investing theses and methods.
Not all of us are as great at overcoming our cave-person tendencies, but that doesn't necessarily exclude us from making great investments. It comes down to picking slow and steady growth stocks that won't invoke rash responses. If you think you might be one of those kinds of investors, then perhaps you should consider Enterprise Products Partners (EPD 1.07%), WD-40 Company (WDFC -0.79%), and Visa (V 1.16%) for your portfolio. Here's why.
Protected revenue streams, prolonged growth
It's hard to find businesses in volatile industries like oil and gas that you can consider a worry-free investment, but Enterprise Products Partners is probably the closest thing you'll find. Unlike many other parts of the fossil fuel industry that generate revenue from the extraction of the fuel or the difference in price between the crude feedstock and the refined products, Enterprise instead generates about 85% of its gross margin from fees it charges for the use of its pipeline and infrastructure network. While that may lead to muted results when oil and gas prices are high, it also means that revenue declines much less when prices are low.
We have had a picture-perfect example of this over the past several years. From 2014 to today, the price of oil declined from north of $100 a barrel down to less than $30, and then back up to $60 a barrel recently -- natural gas has followed a similar trend as well. Throughout that time, though, Enterprise's EBITDA remained incredibly resilient. So much so that the company was able to maintain its streak of 62 consecutive quarters with a distribution increase.
That steady revenue base ensures a certain level of stability, but what sets the company apart is management's ability to invest billions of dollars every year to grow its revenue stream without using too much debt to finance it. This debt problem has been a common theme among many other master limited partnerships and pipeline companies in recent years and has killed shareholder returns. A management team you can trust to be good stewards of shareholder capital is perhaps better than any other reason to not lose sleep over an investment.
Too ubiquitous to worry about
Chances are, you have a WD-40 product in your house and you don't even know it. The company known for its easily recognizable blue and yellow lubricant spray that "fixes anything" has a wide selection of lubricant and cleaning products that are in 85% of all households. That kind of brand recognition may put it in every household, but the more important customers are the ones such as mechanics and other professionals that management estimates spend $70 or more on the product -- keep in mind that a can of WD-40 is about $4. That's a lotta WD-40. With an established customer base that keeps coming back to its product, you can rest assured that WD-40 is generating a lot of recurring business.
What is more critical to the WD-40s business from the investor's perspective is that selling lubricants and cleaning products is a high-margin business with little to no capital investments. For every dollar in revenue, WD-40 generates about $0.10 in free cash flow that it uses to pay dividends and buy back stock, which has been a winning combination for investors for more than a decade.
By no means is WD-40's results ever going to make you fall out of your chair. The company stays out of the headlines, avoids splashy acquisitions, and typically posts very modest revenue growth. Over the long haul, however, this is a company that churns out lots of cash that management uses to manufacture returns for investors.
Dominant market share in a major global market trend
I think you could make a pretty compelling case that Visa has a perfect business model. Its business works behind the scenes to facilitate global commerce, and the people who use their products don't think twice about it. Visa is also in an industry that is awfully close to a duopoly -- sure, American Express and Discover are major players domestically, but they aren't as commonly accepted internationally -- and benefits from economies of scale. Also, the capital requirements to keep the company going are minimal, which means it generates loads of free cash flow and high rates of returns for investors on a consistent basis. What more could you ask for? In this case, you get a near-perfect business with an incredible growth runway ahead of it.
Living in the United States, it's pretty easy to take the shift away from cash to digital payments for granted. You can buy just about anything you want with plastic or on your phone. But if you do any travel outside the U.S., you will find that cash is still the dominant payment method by a country mile. According to the International Monetary Fund, 85% of all transactions still use cash, although that's expected to change as countries move away from cash to reduce illicit activity and increase tax revenue efficiency. With the world's largest payment platform, Visa is better positioned than any other credit card company out there to reap the rewards.
The one thing that could throw Visa's growth and profitability off course is tepid global growth or a recession. If that is the greatest risk to the company's bottom line over the long term, then Visa is a company you can buy and hold with few worries about the future.